Join Sarthaks eConnect Today - Largest Online Education Community!
0 votes
in Economics by (68.7k points)

What is the relationship between the rate of interest and price of bonds?

1 Answer

+1 vote
by (68.4k points)
selected by
Best answer

Interest rates and bond prices are inversely related. Suppose a person owns a bond of the value of Rs.1000 carrying 8% interest. His yearly income is Rs.80. Now further suppose that the rate of interest rises to 10%. The interest income of the bondholder will still be Rs.80, but the value of the bond will fall to Rs.800. It is because that Rs.800 will give an income of Rs.80 at the 10% rate of interest. Reverse will happen, if the rate of interest falls.

Related questions

Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to get solutions to their queries. Students (upto class 10+2) preparing for All Government Exams, CBSE Board Exam, ICSE Board Exam, State Board Exam, JEE (Mains+Advance) and NEET can ask questions from any subject and get quick answers by subject teachers/ experts/mentors/students.